VIX Futures As a Market Timing Indicator

Abstract

This study contributes to the age-old question of whether stock market returns are predictable, by studying the relationship of VIX futures term structure and future S&P500 returns. The objective of this empirical analysis is to verify if the shape of the volatility futures term structure has signaling effects regarding future equity prices movements, as several investors believe. Our findings generally support the hypothesis that the term structure of VIX futures can be employed as a contrarian market timing indicator for the equity market. The empirical analysis of this study has important practical implications for financial market practitioners, as it shows that they can use the VIX futures term structure not only as a proxy of market expectations on forward volatility, but also as a stock market predictive tool.

Keywords: Derivatives, Asset Pricing, Financial Econometrics

JEL Classification: G10, G11